Social Movement / The Daily Reckoning

verfasst von - Elli -, 03.06.2003, 20:21

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The Daily Reckoning

Baltimore, Maryland

Tuesday, 3 June 2003

--------------------

*** The Great Dollar Standard Boom - is it over?

*** Germany in recession. Consumer prices falling. Imports
from China soaring. Europe on the brink of failure...

*** But Mr. Market is still cheerful...almost exuberant -
the poor schmuck. Has America changed? And more...

Why does anything ever have to end?

We have no answer, dear reader. But everything does.
Everything on this sorry ball disappears. Every leaf turns
brown and rots. Every amoeba, statue, bowling ball,
kangaroo, season and love affair gives way eventually. Even
natural stone wears away and turns to dirt.

And you and I, too, dear reader. We have a rendezvous with
dirt, too. We will slide into heaven or hell like a
congressman in a mudslide - that is, with neither grace nor
dignity. May the jolly saints greet us with loud huzzahs
and a shot of whiskey!

The end we are writing about today, however, is not our
own; rather, it is the conclusion of the good times we have
enjoyed over the last 30 years - during the Great Boom of
the Dollar Standard.

The division of labor was simple: foreigners would make
goods, Americans would buy them. Americans would pay with
dollars...and foreigners would lend them back.

It was easy work, exporting trillions of dollars; the
foreigners were happy to take as many as we shipped. They
set up factories and schlepped far into the night in order
to make geegaws that they could trade for them. Global
trade flourished...and everybody seemed better off for it.

"We are in a country that is buying more from the rest of
the world than we're selling, and we're doing it on a big
scale," Warren Buffett remarked on May 21.

"Any other country in the world that did that on that scale
would have seen greater currency depreciation already," he
added."We have such a strong currency historically that
there's been a delayed effect. But it's started to happen
in the last year, and unless the underlying conditions
change, it's going to continue."

Before 1971, countries had to settle their current account
imbalances in gold. The amount of money in the world was
limited by how fast miners could dig the stuff out of the
ground. The Dollar Standard had a near-miraculous effect.
All of a sudden, there was almost no restraint on the
world's money supply. The central banks sold their gold and
piled up dollars. It was boomtime.

Charles de Gaulle saw the final act, even before the show
had started; foreigners wouldn't take the dollar at par
forever. A Dollar Standard, he said in the early '60s,
would allow the U.S. to pay its bills in money of any value
it chose.

Forty years later, it looks like the world's investors may
be catching on too - the Great Boom may be over. Germany
has edged into recession. Italy, too. Consumer prices fell
0.2% in Germany in April-May. Imports from China - driving
down prices - are increasing at a 62% annual rate.
Japan...well, Japan is always in recession, isn't it?

Germany is 30% of the European economy, prompting Stephen
Roach to conclude:"Europe is on the brink of economic
failure."

Here in the U.S., yesterday brought news that it takes
longer to find a new job than at any time in the last 20
years. And the Financial Times revealed the little secret
that our own Kurt Richebächer has been writing about for
years: the productivity numbers that lift Alan Greenspan's
spirits are phony. The numbers he relies upon are gross
numbers. The net figures, which are reduced by
depreciation, show no productivity miracle - not even
close.

And so it was all a lie, after all. Every vanity of the New
Era has now been destroyed. No eternal bull market on Wall
Street. No faster GDP growth. No peace dividend. No extra
payoff from new technology. No greater productivity. No
nothing.

It is all still the same. Everything comes to an end. Even
the big dollar boom. For now, the ungrateful foreigners are
growing chary of the dollar.

Eric, the latest news from Wall Street, please...

------------

Eric Fry in New York...

- Like a tireless sherpa, Mr. Market has been shouldering
the hopes and dreams of million bullish investors, as he
has trudged - step by step - from the depths of Dow 7,500
to the heights of Dow 9,000. Yesterday, however, our noble
sherpa started to show a little strain...perhaps it was the
altitude.

- Whatever the cause, the Dow's brisk 150-point morning
rally, which lifted the blue chips to 9,003, faded to a
gain of only 47 points by the closing bell, depositing the
Dow at 8,898. Likewise, the Nasdaq's early 25-point rally
exhausted itself to become a 5-point loss. The tech-laden
index finished the day at 1,591.

- Government bonds dropped for the fourth trading session
in five, as crude oil surged back above $30 per barrel. The
rising price of crude oil is no surprise to Outstanding
Investments editor, John Myers, who has been predicting for
weeks that the swift conclusion of the Iraqi war would not
produce a swift conclusion to the bull market in oil. To
the contrary, as Myers predicted, crude oil and natural gas
prices continue to march higher. Yesterday, crude for July
delivery jumped $1.15 to $30.71 a barrel. July natural gas
soared 16.4 cents to $6.415 per million British thermal
units.

- The ancients used to consider soaring energy prices a
harbinger of inflation. But in today's sophisticated, fully
hedged world, runaway oil prices happily coexist with
widespread deflation-phobia.

- Yesterday afternoon's mini-selloff in the stock market
notwithstanding, evidence of investor exuberance is
plentiful. Unfortunately, an exuberant investor is often a
wrong-footed investor. In other words, investors tend to
become giddily optimistic, immediately prior to steep
selloffs. If past is prologue, the bullish contingent of
the lumpeninvestoriat may have cause to be nervous.

- According to the latest survey of the American
Association of Individual Investors (AAII), bullish
sentiment is rampant. 62.9% of the individual investors
surveyed characterize themselves as bullish, versus a mere
14.3% who say they are bearish.

- Ominously, this is the highest bullish reading in the
AAII survey since March 2000, a month that will live in
infamy. For those folks who may be new to this investing
stuff, on March 10th, 2000 the Nasdaq Composite Index
reached its all-time high of 5132.52 - a number that is a
mere 222% above current levels. Or, looked at from a glass-
half-full perspective, an investor who had purchased a
representative basket of Nasdaq stocks on March 10, 2000
would require ONLY seven years of 15% annual gains to
return to break-even.

- Conspicuously, homebuilding stocks failed to participate
in yesterday morning's rally, and also led the way down
when the stock market faltered in the afternoon. We would
not read too much into one day's trading action, except to
observe that homebuilding stocks are probably due for a
rest.

-"There doesn't have to be a bubble in the housing market
for a dangerous speculative meltdown to develop in
homebuilding stocks," asserts Barron's Michael Santoli.

-"They're becoming increasingly vulnerable to expectations
that might not be met for continued growth...One hedge-fund
manager, who claims to have placed some short bets on the
group just last week, points out that earnings for some of
these companies are calculated based on the cost of land
acquired, in many cases, years ago, at comparatively cheap
prices. This makes margins look better. Meanwhile, they
continue to acquire land and small developers from sellers
who are well aware of rising real-estate values. So, costs
are rising. Inventories of homes at some companies are
beginning to rise, a potential sign of slower customer
uptake. While interest rates are quite low, that's exactly
why they can't easily fall much farther to spur more
demand...Some day, these arguments will probably matter
quite a lot to investors. But who knows when?"

- True enough, but one item that might matter fairly soon
to the buyers of homebuilding stocks is the nation's
troubling (un)employment trend. Unemployed and
underemployed Americans buy far fewer homes and those who
are drawing a steady paycheck.

- Tomorrow, we'll take a brief tour through Unemployment
Land to see how the nation's job market is looking...and to
gauge how confident - or nervous - the nation's
homebuilders ought to be.

------------

William Bonner, still in Baltimore...

***"The world really has changed," colleague Dan Denning
said over dinner last night."Of course, America has to act
differently...the challenges are different."

We are not sure the world has changed. But America is
becoming a different place.

"I've been here for 10 years," said a French friend."For
the first time, my wife and I feel out of place...we may
head back to Europe..."

"I've been visiting America for years and years," confided
another friend from Australia."On my last trip, a few
weeks ago, the place seemed different. Americans seem so
fearful..."

What, we have been striving to remember, was it like
before...before 9/11, for example? To that end, we've
assembled a series of essays exploring the very idea of
America. You can get your own copy here:

The Daily Reckoning PRESENTS: Ruminations on the French
national pastime...


SOCIAL MOVEMENT
by Addison Wiggin

"Is he late?"

"Not any more than the others."

"We took the bus. It took over an hour to get here."

"Hey...when there are strikes, you're lucky to get a bus at
all. Beautiful day though, isn't it?"

"It's raining."

Thus went a short interchange at the door of my son's
school this morning. Today, a general strike of"unlimited
duration" began in France. During rush hour this morning,
the city's streets came to a veritable standstill. My son
used the extra time on the bus to grab some extra zzz's
before his arduous pre-school day began in earnest...while
I pondered the French national pastime.

For the American expat, strikes are an amusing carbuncle on
the fesses of life in France.

In the spring of 2000, for example, not long after we set
up shop here in the Daily Reckoning HQ in Paris, the
armored-car drivers union (the French version of specie-
carrying Brinks trucks, that is) declared an"unlimited"
strike. Apparently, Basque and Breton separatists, in two
different regions of the country, had managed to get their
hands on a supply of shoulder-held rockets. After which
they began using armored cars for target practice. Sure,
some 30% of the money they carried would get burned up in
the aftermath...but the other 70% allowed the terrorists,
among other things, to buy more shoulder-held rockets.

Not too keen on the practice, the armored-car drivers
wanted the government to provide them with hazardous duty
pay - and were prepared to choke the supply of"fric" to
the nation's capital in order to get it. They went on
strike for ten days. By the end of the third day or so,
there wasn't an ATM in the city dispensing paper money.

Imagine, if you will, all the liquid cash drying up in New
York City or London. It's inconceivable.

But Parisians took the event in stride. Many shops simply
closed. The proprietors, like the rest of the city, whiled
away the days in the city's famed outdoor cafés...where you
could only purchase a pitcher of red wine with a credit
card."Vive la grève!" they would say...

We're not bringing up the French passion for taking to the
streets so readers can enjoy another snigger at their
expense. The Frogs are plenty capable of offering snigger-
bits on their own. No...we bring up the strikes this
morning because they are the charming French response to an
economic crisis about to sweep all of the Western world:
the swamping of the welfare state.

As well-intentioned and brilliant as the idea may have
appeared at its outset, the welfare state - the promise
Western governments made to care for their citizens from
cradle to grave - is fast running out of time...and money.

For the wine-addled observer, the details on the French
strike are almost irrelevant. France, like the U.S., Great
Britain, Japan, Germany, Italy, Portugal and (insert name
of giant welfare state here) has what's called a"pay-as-
you-go" pension system. Retirees drawing from the system
are paid off by workers still on the job. There's no
investment, no financing, no logic...just a massive
transfer of wealth.

In an effort to prop up this Ponzi scheme as long as
possible, the government here in France has proposed mid-
stream rule changes similar to those passed in the U.S. in
1997. They want to slightly increase the amount of social
security taken from each worker's paycheck and
substantially lengthen the amount of time workers will have
to continue to toil before they begin getting somebody
else's money back. Those going on strike are okay with the
tax increase; they just don't want to work any longer than
they already have to..."Vive la grève!"

Bureaucrats, quants, pension fund managers, retirees and
workers' unions around the West are in a death struggle
with the hard math of demography. And it's not just that
baby boomers getting older. After the baby boom generation
made their way from pampers to blue jeans, plunging birth
rates became the norm in many industrialized countries.

In Japan, always the trendsetter nation, abortion was
legalized in 1954 - nearly 20 years before Roe v. Wade. The
event roughly coincided with the introduction of the
"pill"...and the birth rate has never been the same since.
As you may have read on occasion in the Daily Reckoning,
we've found ample evidence to suggest that the bubble in
Japan rode the crest of the boomers as they lived through
their highest"getting and spending" years...and the
economy has subsequently suffered a decade of malaise, as
these getters and spenders began to get and spend less and
less.

The much smaller generation of younger"getters and
spenders" following behind the boomers hasn't been large
enough to make up the difference. Likewise, pensions have
been decimated.

"Ever been to Florida?" asks Peter Peterson in his book,
Gray Dawn. The percentage of the population residing in
Florida aged 65 and over is about 19%. By the year 2023,
then entire United States will reach this benchmark. For
France and the UK, the date arrives a little sooner: in
2016. Japan is all but there...they'll cross the 19%
benchmark in 2005.

Italy IS there already.

"When we went to Italy [on our world tour]," Jim Rogers
told us in a recent conversation,"there were restaurants
where everyone was over 50. As a result of that observation
on the ground, and if one had NOT done one's homework and
done the demographics, it would have slapped you in the
face."

While researching our own book ("Financial Reckoning Day"
John Wiley & Sons - due out in September) we noticed that
throughout history, large shifts in demographics have
always had mutating effects on the societies striving to
support them...just as we might expect from the aging of
the West.

"So what should be done about it?" the politically
disaffected will invariably ask. In France, this morning,
the response is to begin quibbling over the details. And,
of course, take to the streets.

Our cheerful response: do nothing.

The"pay-as-you-go" system was a bad idea in the first
place. The faulty mechanics of it are merely being exposed
by an historical trend bigger than any political will. The
world changes. Which of those doing the paying and going
right now really expects to be getting and enjoying some
time in the future, anyway?


Regards,

Addison Wiggin,
The Daily Reckoning

P.S. During our conversation, Jimmy Rogers also talked
about discovering an overwhelming number of girls in ratio
to the number of boys while traveling through Korea.

"Right now," Rogers told us,"for every 100 14-year old
girls, there are 120 14-year old boys. The status of women
has been horrible in Asia for centuries. They've been
third-class citizens. That's going to change.

"And it's not just Korea. It's all over Asia. And it's not
just one year. Last year in China, there were 117 boys born
for every 100 girls. When those girls become 22-year old
women, and realize they can have any man they want, it's
going to change their world. It's going to change
education, politics, the professions...everything."

What did Rogers"do about it" when he made his discovery?
He invested in all the Korean companies that make birth
control pills.

[If you haven't had a chance to pick up a copy of Rogers'
book Adventure Capitalist, I recommend doing so. You can
easily by following this link]

Adventure Capitalist
http://www.amazon.com/exec/obidos/ASIN/0375509127/dailyreckonin-20


P.P.S. The bus we take to get to the school takes us past
the Panthéon, through the Place St. Michel, between the
Pont des Arts and the Institut de France, through the
courtyard of the Louvre and past IM Pei's glass pyramid, up
the Avenue de L'Opéra, where we get off next to the Opéra
Garnier. Tourists from all over the world pay good money to
get here a make similar bus rides. And even when it's
raining, the women in Paris are extraordinarily beautiful.
The fact that it took an extra half an hour on the bus this
morning actually suited me just fine."Vive la grève"...or
if you prefer...snigger away.


Ed note: Addison Wiggin is the managing editor of the Daily
Reckoning.

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• Social Movement / The Daily Reckoning - - Elli -, 03.06.2003, 20:21